The EOFY Reset with Dave Philips

1. What led you to start the business?

Small business is the economic engine room of Australia, but more importantly, these businesses reflect the dreams and aspirations of so many Australians who deserve better outcomes for their hard work, dedication, and the risks they take every day. With over 30 years’ experience in building small businesses, we understand the challenges faced by business owners on a daily basis.

Our vision is that every small business should prosper and reach its true potential, creating wealth and happiness for all stakeholders by offering genuine value to the market it serves.

2. What are some significant things you have learnt from this line of work?

Running a small business requires more than passion and hard work. It requires the business owner to develop a wide range of skills outside of their disciplinary background. There are so many elements to running a successful business, and often, it’s the things we don’t know or fail to see which cause us the most pain.

Moving the levers in a business without understanding how they interrelate can be risky. However, what’s interesting is that the individual elements of business are not that complicated, but the way they all fit together and interact is very complex. For example, dismantling and reassembling a Ferrari is complicated, but the ecosystem of a rainforest is incredibly complex. That’s how I see business.

3. What is one misconception people have about your work?

There is rarely a silver bullet that will magically fix an underperforming business. There are many elements that combine to create an optimally performing business, and as such, we need to look at making iterative improvements across all areas of the business. It’s a matter of dialling up each element one notch at a time but doing so in the right order. For example, there is little value in driving sales inquiries if the margins are wrong or the business is not geared to process increased sales volumes.

4. What are your predictions for trends and patterns in the next financial year?

The macro economic environment is looking reasonably stable, however there are many geopolitical icebergs that could see that change in a hurry. While on the micro-level, the opening of the Metro has created enormous opportunities to expand marketing initiatives into adjoining regions.

From a strategic perspective, small business owners need to be looking at how they can leverage technology to improve efficiencies and deliver more value, for less. Developing sustainable competitive advantage that allows the business to avoid the discounting death spiral is the best long-term strategy to mitigate any unforeseen downturn in the current economic climate.

5. Why is it important to stop and consider the structure of your business at this time of year?

There are many factors that must be considered in determining the best structure for your business, such as;

• Asset protection
• Tax minimisation
• Income distribution
• Capital requirements
• Future growth plans
• Intellectual property and licensing
• Risk and liability mitigation
• The nature of the relationships between the parties

Everyone has different circumstances that need to be considered, so there is no one right structure. The key is getting the right advice as early as possible to avoid unnecessary legal costs and creating avoidable tax obligations. Although June 30 / July 1^st is the ideal date for a clean transition into a new structure, there is much to be discussed, planned, and implemented, so the best time to consider your structure is now. That way you will be ready to execute at the most optimal moment.

6. How best should business owners reflect on their business?

With the financial year just closed, now is the perfect time to review the performance of the business over the past year. Careful analysis of the results will create the necessary insights from which a range of strategies can be considered for the coming year.

There are several key metrics that every small business owner should be concerned with:

• Are sales inquiries increasing or decreasing?
• Is the conversion rate of inquiries into customers improving, or are our competitors wining more of the market?
• Is the average value of each sale increasing, or are we missing opportunities to extract value from each customer? Alternatively, is the business operating in a price-sensitive market, and if so, is your offering differentiated?
• Is the Gross Profit Margin (the ratio between revenue and the cost of sales) improving or are margins tightening?
• Are the business’ overheads being managed effectively, or are overheads increasing in relation to sales revenue?
• Is the market in which we operate expanding or contracting, and are our competitors doing a better job at meeting the needs of our clients than we are?

The answers to these basic questions will illuminate areas of strategic focus for the coming year. For example, do we need to be focusing on increasing marketing performance, sales tactics, reducing costs, improving operational efficiencies, or any combination of these ideas? Should we be expanding our offering, or narrowing into a more targeted niche?

In addition to reflecting on financial results, business owners need to be continuously scanning the external environment to seek opportunities to exploit or threats to be mitigated. To be effective in this, the business needs to undertake a review of their competitive advantages and align those with the market.

7. When should an owner consider a succession plan?

Every business owner should have an exit plan. Although there are many ways to exit a business, such as handing the business over to the next generation, an internal management buy-out, or selling the business on the open market, the value realised will be directly relational to the degree to which the business has planned for this inevitable day.

The value of a business can be optimised in many ways, and therefore the more preparation, the better the outcome for the business owner. Notwithstanding that the best time to consider your exit was the day you started the business; the next best time is NOW.

Some key considerations include timing and profit maximisation; leadership development; systems and processes that allow the business to thrive after your departure; taxation and legal matters. Each of these areas are complex and business owners should seek the advice of their accountant, lawyer and business advisor to develop a strategy that maximises the value extracted and minimised the disruption to the business.

Another important consideration is being adequately prepared for an unplanned event such illness, death, or relationship breakdown. Ensuring matters such as Wills, Shareholders’ Agreements, Keyman Insurance, Powers of Attorney etc. are all in place BEFORE they become important is a crucial step all business owners must take.

8. What are the key mistakes business owners make when it comes to succession planning?

The key mistake I see many business owners make is a lack preparation. Effective exit planning requires a long-term implementation plan to ensure the business is as prepared for the transition to new management as possible. When it can be demonstrated that the business will function without the owner at the helm, a potential purchaser will place a higher value on the business.

It is important to remember that many business owners consider their business to be a key factor in funding their retirement, and as such, ensuring the most value is extracted is very important. Given that businesses are often valued on a multiple, every dollar we can increase in value, will result in several dollars on sale. Having the optimal legal structures, tax minimisation strategies, robust processes, and tidy accounts will all add significant value on exit.

Of course, life has a habit of throwing curve balls, so the best time to plan is when it is important, rather than urgent. In other words, start planning now!

9. What are your top tips for business owners as we head into the new financial year?

The new financial year creates the perfect opportunity to review your business plans and set strategic objectives. So, here are a few ideas:

• It’s important to remember that the most successful businesses are clear on their vision, mission and values, and every decision made is guided by these overarching documents.
• It’s vital that the business participates in a continual process of strategizing, implementation, measurement, and tactical adjustment to meet the ever-changing market conditions.
• Build a dependable team of professionals around you that share your values, will challenge your assumptions, and introduce new ideas into your business. As the saying goes, if you think good advice is expensive, you should consider the cost of bad advice.
• Make a commitment to become a better leader. Lead your organisation to be the best in every key success factor for your industry.
• Most importantly, understand the needs of your customers and get serious about meeting those needs better than your competitors.